Greetings, and welcome to the Quanta Services Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip Rupp, Vice President of Investor Relations. Thank you, sir. You may begin.

Great. Thank you, and welcome, everyone, to the Quanta Services fourth quarter and full-year 2018 earnings conference call. This morning, we issued a press release announcing our fourth quarter and full-year results, which can be found on the Investors & Media section of our website at quantaservices.com, along with a summary of our 2019 outlook and commentary that we will discuss this morning. Please remember the information reported on this call speaks only as of today, February 21, 2019, and therefore you’re advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quanta’s expectations, intentions, assumptions, or beliefs about future events or performance, or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond Quanta’s control and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the cautionary language included in today’s press release, along with the company’s 2017 Annual Report on Form 10-K and its other documents filed with Securities and Exchange Commission, which are available on Quanta’s or the SEC’s website. You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today’s call, including adjusted diluted EPS, backlog and EBITDA. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you’d like to be notified when Quanta publishes news releases and other information, please sign-up for e-mail alerts through the Investors & Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta’s President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services fourth quarter and full-year 2018 earnings conference call. On the call, I’ll provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta’s Chief Financial Officer, who’ll provide a detailed review of our fourth quarter results and 2019 guidance. Following Derrick’s comments, we welcome your questions. 2018 was another strong year for Quanta. We’re pleased with our results and strategic position in the marketplace. We believe our investments in craft-skilled labor and our strategy to strengthen our base business model over the last several years will continue to distinguish Quanta in the utility, energy and communications infrastructure industries. Upon transitioning into the CEO role in March of 2016, our five-year plan to create shareholder value, including – included the following key elements: focus on the base business to increase earnings stability; improve margins in each segment; generate $1 billion of repeatable and sustainable adjusted EBITDA; provide solutions to our customers through deep collaboration; and create growth platforms through service line expansion in the utility, industrial and communication industries. We have grown revenues considerably over the last three years, but more importantly, we have increased profits faster than revenues during that time and improved our return on invested capital. Many of the goals we accomplished in 2018 move us well down the path of achieving our five-year goals. Our accomplishments in 2018 include; we increased EBITDA by 27%, surpassing $900 million for the first time in Quanta’s history. We ended the year with record backlog of approximately $12.3 billion, which includes record 12-month and total backlog for our Electric Power segment. This is noteworthy and demonstrates the strength of our core operations considering we burned off significant backlog from the Fort McMurray West Electric Transmission Project in 2018,…

Thanks, Duke, and good morning, everyone. Today, we announced record revenues of $3.1 billion for the fourth quarter of 2018, a 25.6% increase over the fourth quarter of 2017. Net income attributable to common stock was $56.8 million, or $0.38 per diluted share, compared to $113.6 million, or $0.72 per diluted share in the fourth quarter of 2017. Adjusted diluted earnings per share, a non-GAAP measure, was a record $0.96 for the fourth quarter of 2018, as compared to $0.45 for the fourth quarter of 2017. Certain items impacted the fourth quarter of 2018 and 2017 and were reflected as adjustments in Quanta’s adjusted diluted earnings per share attributable to common stock calculation, which I’ll discuss throughout my remarks. Discussing our segment results. Electric power revenues increased 5.4% when compared to the fourth quarter of 2017 to a record $1.66 billion. This increase was primarily due to increased customer spending aided by approximately $40 million in revenues from acquired businesses, $24 million of incremental emergency restoration service revenues and approximately $14 million of increased communication infrastructure services revenues. Operating margin in the Electric Power segment was 9.8% in the fourth quarter of 2018, which is relatively comparable to the fourth quarter of 2017. Our communications operations are included within our Electric Power segment and notably, the U.S. portion of these operations generated its first quarterly profit. On an annual basis, the Electric Power segment grew almost 15% for the year, with revenues at a record $6.4 billion and operating income grew over $110 million, or 21% to a record $628 million. Without the dilution from our communications operations, electric power revenues generated margins in excess of 10% for the year. Our Pipeline and Industrial segment revenues increased 61%, when compared to the fourth quarter 2017 to a record $1.45 billion…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Alan Fleming with Citi. Pleased proceed with your question.

HI, good morning, guys. Duke, you talked about, obviously, lower levels of large diameter pipeline in 2019, $850 million lowest level since 2015. Maybe you can just talk about your confidence that this is only a low – temporary low in the current up-cycle and not a kind of cooling off of that cycle? And and maybe your visibility on the large diameter side and opportunities to redeploy some of the available capacity that you had for Atlantic Coast, both in 2019 and 2020, how are you thinking about that?

Yes, thank you. I think when we look at the segment itself and what we have this year, we’re confident the $850 million, we don’t need any extra awards to achieve our midpoint of our guidance. We’re looking at the company and the portfolio. We’re also looking at the segment with our large diameter pipe becoming less and less of that segment. It’s more steady. It’s less risk and we continue to perform underneath the large diameter pipe. And saying that, the opportunities are still there. We talked about $6 billion in total for both electric and gas. We continue to see opportunities this year and into the future. By no means that we think we’re at the bottom of the cycle, but it will cycle. It is a cyclical business in large diameter pipe. We continue to make that less of that segment over time and we’re growing underneath quite nicely. We’re real proud of where the segment sits. The opportunities are still there. We talked about the LNG exports. We talked about moving gas and – of the Permian down into the load centers. So there’s plenty of opportunity out there and there’s plenty of opportunity to backfill second-half of the year and on into next year. We still like that segment and still like that large diameter pipe business.

Okay. And Derrick, maybe you can help us with some of the puts and takes on the margin guidance in electric power and business is growing, but the midpoint of your margin guidance is kind of flattish year-over-year. So is there anyway to kind of quantify the impact you’re seeing from lower levels of large project work and less storm work and then the drag from communications that is continuing to grow? And besides operating leverage, is – are there any positive offset that are helping you to absorb some of those headwinds?

Yes, broadly, I mean, when you look through the communications dilution into 2019, I think it’s important to recognize that we so look at the Electric Power segment to have the ability to operate at a double-digit margin. That’s our target margin percentage. At the midpoint of the guidance right now, the electric power as a standalone is operating at double-digit margins, which considering the contribution that we’ve had from the large project here in 2018 that contributed being able to get to that performance. We’re still pleased with where that margin performance is overall coming out. We think long-term, that’s the target margin. Communications providing a little bit of headwind against that in – from a segment perspective. But to that end, we still think that can ultimately operated at around a 6% margin performance with a growing level of margin contributions through the year exiting, as we’ve said before, kind of in the double-digit margin profile as well. So, we’re – we feel like that the strength of the segment is still operating there. It’s important to think that – back on the large projects side, I mean, a large project component of electric power is ultimately the smallest contribution in a decade. And so to the extent that we’re able to operate at a double-digit profile of electric power. That’s that base business contribution and showing that the portfolio is still ultimately able to execute.

Thank you. Our next question is from the line of Tahira Afzal with KeyBanc. Please proceed with your question.

Hi, thank you and congrats on a very strong quarter by the way.

Thank you.

Duke, first question is, you talked about earlier in your prepared commentary about sort of a mid single-digit growth rate for the industry. Given what seems to be an edge that you have from all the training facilities, should be assume that should provide you an edge to really outperform the industry growth trends over, let’s say, a three to five-year time horizon?

Yes, thank you. I think I was speaking to us and the industry. Look, I don’t – can’t comment on that, you have to look at it. But when I see it – when we see our growth patterns, we say mid to upper single digits. You can go back through the years and look at our performance and look at what we’ve done based upon craft-skilled labor putting people in the field and our ability to do so. I like our chances to continue to grow that. We set up or to mid single digits over time. And if you’re coming off, let’s just call it, 90% in the base business and we’re growing to mid to upper single digits. You’re growing quite nicely and it’s repetitive, it’s resilient and we like the backdrop which is 60% of it is based upon utility spends.

Got it. Okay, Duke. And second question for me. It’s good to hear about your conversion rate to free cash flow. If I look at some of your peers and other industries that have more of the business base driven by base load activity, which is the way you’re converging. The free cash flow rates are 70%-plus, so I don’t know, but this is a question for Duke or Derrick. But over time, where do you see your conversion rates going?

I would just say in general – I’ll let Derrick comment. But in general, with the growth that’s underneath of the base upper single digits on, call it, $9 billion, it’s quite a bit of growth underneath. And that’s – and if you look at us, we self-perform about 85% to 90% of our business. So in saying that, we derisk our business from a labor standpoint and I hear quite a bit from peers and such that they have labor issues. I don’t think we have that. I think when you look at us, we execute quite nicely in our base business. So – and I’ll turn the rest to Derrick.

Yes. And on the base business side, I mean, to the extent that we see those levels of growth. I mean, one of things that we’ve always said is the high levels of growth will require a level of working capital commitment. So that base business is still you’re consuming that. And then the other thing unique to 2019 is that, as we commented, we do have some pre-petition receivables that are out there that we did not forecast to be turning to cash. In 2019, we think that’s conservative position, so that also weighs on the conversion rate unique to the year.

Thank you. Our next question is from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi, thanks, and again congrats on a nice quarter. first just – first on the electric side looking at the strong growth you’re expecting in the base business. Could you kind of give us a feel for your thoughts on just the general trends in the underlying end markets versus what you think you may be gaining through share gain? And then if you could comment on how some of the events – expand upon how some of the events like the wildfires in California and other natural disasters are impacting how utilities are thinking about grid resilience?

Yes. Thanks, Noelle. I think if you look at the data that’s out there, you’ll see many of our customers are investing in both CapEx for storm hardening, which is related to wildfires storms around the Gulf Coast, East Coast. So those things continue to happen, they’ve happened over time. It seems like it’s more frequently – I’ve seen it go both ways, where you have natural disasters that are quite prevalent for two or three years and then there’s a low. So, whether something we can’t predict, but we do see a lot of that today. I do believe that the most of the public is willing to pay for resiliency and that’s what you’re seeing with the grid. And in general, you’re also seeing different forms of generation going into renewables or natural gas. So the grid is moving around from a transmission standpoint to accept those that load on to the systems. And also the last thing I would just say is, the modernization is certainly taking place and it’s broad based. It’s not one customer, it’s across the Board and it’s necessary to have a modern system in a modern economy. And I think it’s – I think our customers and ultimately the ratepayer benefits from the investment that’s been done and continuing. I do believe we’re in early cycles as well.

Okay, thanks. And then you kind of touched on this a bit. But just given some of the regulatory delays in – on the large project pipeline side, pushing out some of that work. Are you seeing any kind of increased competition for small to medium type of work, as competitors or other players who may have been on some of those lines trying to fill their book?

I think, in general, we’ve really concentrated on that base and making sure that we’ve grown that and really at the customer level collaborating with them. We really see us just continuing to grow that out. As far as the FERC and all the decisions that are made thereon, let’s call it, MVP, ACP or whatever you would like to talk about. There’s plenty of opportunities underneath all that, that don’t make the headlines that are $90 million or $100. It’s not the big project that we tend to talk about everyday. There’s lots of those out there. There’s lots of opportunities for us across the Board on those projects. We’re pleased with where we sit, more pleased with how we’re executing. And I still think it goes unnoticed that last year we had about $2 billion of large projects. In the guidance this year, there’s about a $1 billion. All that is base business growth that you see into 2019 that I still think goes unnoticed. We continue to talk about a very, very, very small position of what we’re discussing in 2019. So I just want to reiterate, again, the growth of the company at the base level and the margins around it that are sustainable and resilient.

Thank you. Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. Duke, I guess, my first question. If I look at your oil and gas margins in 2019 compared to 2018, your guide implies they’re up year-over-year, even if you add back the asset impairment charging in the fourth quarter, with significantly less mainline pipe business. So what I’m trying to understand is the profitability of your base business within oil and gas? And I guess, as I think over the long-term, is there a path to get your oil and gas base business margins more comparable to what we’re seeing in electric power, because your electric power margins are 10% with little large project work. So I’m just wondering if oil and gas can get to electric power margins in similar base business over time? Because if that’s true, that’s a pretty compelling story? My second question is, as I think about your 2019 guide again for electric power and oil and gas, you’re not assuming much in large projects. Is there less work you need to win to achieve your guidance in 2019? And then if we do get some larger projects, can you help me understand the operating leverage we should get within each of the segments? Thank you.

Yes. Thanks, Jamie. First to address the base business and the margins, I think, as a company as a whole, we work in a portfolio and many offices are consolidated. So when we look at that and we look at the company as a whole, we stated our goal, an adjusted EBITDA of 10%, we stand by it. And saying that, obviously, the gas margins are depressed. But you can see the guide from where we ended the year at 5.4%, ended the guide at 6%. That’s on less risk what we consider more sustainable margins going in. That being said, we’ve talked about mid to upper single digits and the base in the gas side and I still believe those are achievable. The large projects, as we – we’re talking about, we need – we’ve also taken a prudent approach in our guidance. We have to work through contingencies on the larger projects as well as the base. We’re in seasonality of weather and such. And so we do take all this into account. You don’t hear us comment too much about, well, Atlantic Coast pushed or this pushed. We don’t make a lot of press releases on that. It’s because we work through these things and we work through our contingencies. So we do understand the risk of those types and we have taken those into account. As far as the large projects this year, we have $850 million in our guidance. We feel comfortable with that. And as we go forward, there are certainly opportunities. We’re bidding work everyday. We’re negotiating work. I expect us to fill in on the back-half with work. We’ll talk about it as we get it. But again, I think, what you see is the very strength of Quanta coming together on the gas side and continuing to increase the baseline margins of the business in the gas side and ultimately, trying to achieve that adjusted EBITDA across the Board of double digits.

Thank you. The next question is from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.

Hi, good morning, guys.

Good morning, Chad.

Good morning.

Good morning. Can you give us a little more color on the guidance sensitivity relative to Atlantic Coast Pipeline? Does the low-end contemplate a full mobilization?

I think what we said is minimal revenue and operating income there in the Atlantic Coast Pipeline. I think it pushes into 2020, 2021, somewhere in there. Again, we think the project is good. It’s going to go. We will defer to Dominion on timing. But as far as 2019 stands, we have very minimal revenue in it.

And that’s actually, I’ll try to clarify. You’ve referenced it to the low-end, and that assumption that Duke made is applicable to low, medium and high-end of our guidance for oil and gas.

Got it. And then I also wanted to get more color on the $850 million of large pipeline for 2019. How much is fully permitted? And also how does that geographic distribution differ versus last year? Just trying to figure out if there’s higher Permian concentration, and what that mean for confidence that these projects may not get delayed, or held up by regulatory issues?

Yes. We’re extremely confident the $850 million either mobilized or have a high degree of likelihood of mobilizing or already on the jobs. So we’re very, very confident in the $850 million guidance, and it’s basically the same North American footprint.

Thank you. The next question is from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Great. Thanks. I guess, Duke, just on the oil and gas parts of the business that you’re exiting with bunch of the impairment charges. I guess a little bit of detail as to what those were and why you exited them would be helpful just so that we can understand what’s kind of core today and what is – and what is not core?

Yes, sure. I think we stated all the way back to 2016, when I assumed the role as CEO that the energy-related assets and things that we do related to oil were core to us and we would continue to look for ways to exit that in a systematic way that was – that would benefit our shareholders and I think we’ve done that. When we look at the assets and they are basically supporting some of the Gulf Coast operations, marine type stuff and we exited that this year. We also wrote a boat off earlier in the year, so that was some of it and this is kind of a culmination of some of that as we move forward. I believe it’s largely complete and we like our portfolio going forward and like where we stand.

Okay, that’s helpful. And then just my follow-up here is, just on the terms and conditions around some of the pipeline awards that you’re at least looking at right now on the larger side. Clearly, there has been delays and permitting issues across the Board. We’ve seen, I think, in the public markets different contract styles that are negotiating. Under the ones that you’re looking at right now, are you still getting – or can you talk about the level of protections that you’re getting from regulatory or permit-induced stand-down, just so we can kind of evaluate the rest as those continue to fall into backlog?

Yes. I think our projects, I would say, we’re not incurring cost on any of our delayed projects, it would be cost-neutral at a minimum. So we feel like we have done a nice job of protecting ourselves against permanent risk. It’s a collaborative effort with their owners. We want to make sure that we’re both collaborative with them. We understand the risk and we’re certainly in a – discussions with them on a daily basis about those risks. So in general, we work together on trying to get things built.

Thank you. Our next question is from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

Hey, good morning, guys. First question I wanted to ask, what would you say is your strategy for nonunion pipeline? There’s so much work in the South, down in Texas. I know you have a small subsidiary that works in that area. Just curious what your thoughts are in growing that business?

Yes, we do quite a bit of work in the Texas areas. And so we continue to look at that segment, look at the base business in the segment. I think, we’re growing underneath nicely. I think when you look at us in the Permian Basin, you saw us make an investment in the Permian Basin this quarter. So it gives us some more looks at different workout there. We’ll continue to look at that. There’s some electrification that goes on. We do have quite a bit of nonunion midstream type work down in the areas. We like the business. We’re certainly opportunistic as it comes across.

Okay. And then second question in telecom. You said there was – I think it was telecom. You said there were several opportunities that were large and could get booked in. Just curious if those are in your $500 million of revenue that you’re expecting from communications in 2019?

Yes. I think in general, when we look at that communications segment and the business underneath, it’s not in the segment, it’s on the electric segment. But in general, we see lots of opportunity out there. I want to make sure that we can get to the field and get our operating margins where they need to be. I think with all the businesses that we’re looking at, the macro markets are good. We can certainly drive the top line. We’re highly concentrated on driving the margins and the risk. So we’re looking at the margins and the risks as well as the top line. But the macro market in telecom business is good. We continue to add customers and customer base. To the extent, there were sizable awards or whichever, a lot of those things are multi-year. And so we wouldn’t look at that being a large contribution necessarily to the 2019 relative to our current guidance.

Thank you. Our next question is from the line of Nick Amicucci with UBS. Please proceed with your question.

Hey, guys, good morning. So quick question around kind of just looking at the recent asset sales from pipeline operators. Just curious, because you guys have spoken a lot about the core business and how you’re looking to grow that. How does that affect – with these asset sales, is there a contract kind of run with the land, so to speak, or would you – would it be new negotiations that would be undertaken if those – if that – those assets were sold?

Typically, our contracts survive any kind of sale. And normally, they need us and we’ve worked on systems or with customers for a long period of time. We’ve not had any issues over time with assets being sold and our contracts not moving with them, typically that happens.

Okay, great. And then I guess, you kind of touched upon this. When you’re looking at these new types of projects? Are there a lot of – is there a lot of more Brownfield extension type of work, or is it more greenfield? And if you could kind of give us some more – I know you touched upon the LNG dynamic. I mean, are you seeing any opportunities in NGLs higher than normal or anything like that?

Yes. I think we see growth across the board and the gas side. I think those larger projects that we talked about in LNGs, they’re certainly out there. We’re looking at them. But the base of it is right around the utility space and the LDC business, the industrial business, critical path solutions around those things that are allowing us to grow underneath on the LNG exports and things of that nature. So that’s where the growth is that we’re seeing. Obviously, when you put large, large projects on top of that, it looks real nice and we can do great things with it. But in general, what we’re concentrated on is growing that base business in that segment.

Thank you. Our next question is from the line of Blake Hirschman with Stephens. Please proceed with your question.

Yes, good morning, guys. Just in light of the improving free cash flow outlook, I wanted to ask about how we should be thinking about your plans and use of cash? You’ve obviously been kind of buying back some stock, initiating dividend, doing some M&A as well. So I just wanted to get an update there?

Yes, I’ll let Derrick comment some. But just in general, the company has taken a position that we want to be able – we want to be flexible enough that we can lean into an acquisition, lean into our stock, our dividend or whatever it may be. So we want to make sure that we’re flexible with our balance sheet. And the opportunities here in front of us, we’ll certainly look at those. You’ve seen us big quite aggressive in our stock buyback, which I think is paying dividends for us now. But I’ll let Derrick comment on the rest of them.

I mean, I think, Duke hit it. I mean, our capital allocation priorities remain the same. We’ll be very focused on ensuring we can lean into any of the working capital requirements associated with the business. It’s always the number one priority we have. There are opportunities there. We’ll ensure we’re well positioned to lean into that acquisitions and investments. You see the investment as an example here in the press release today within Agua Blanca. Those type of things are things we’re always mindful of, and we will ensure we have a balance sheet in a good position to be able to lean into. And then just to lay out lastly, I mean, obviously, from a capital allocation, we’ve leaned into shareholder value with the stock repurchases and dividends quite heavily. And so that will continue to be part of our equation. We don’t forecast that into 2019 or forward, because we look at that as being born opportunistic, but largely against the other allocation areas that we have. We think the working capital, M&A and investments are long-term value creation, and we’ll continue to do that. Lastly, with the overall parameters of ensuring, we maintain a very strong and conservatively placed balance sheet.

Got it. thanks.

Thank you. We have reached the end of our question-and-answer session. So I would like to turn the floor back to management for any additional concluding comments.

Yes, I want to thank the men and women in the field. They’re performing at an extremely high level and I want to thank them. I’d also like to thank you for participating in our fourth quarter and our full-year 2018 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you, and we look forward to 2019. This concludes our call.

Once again, ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.